IMF’s warnings: ‘risk of a sharp tightening of financial conditions’

When stocks are overvalued, stop buying them as if we are in a ‘never ending’ best-seller movie. When properties are overpriced, stop buying as if they are an asset. An asset is also defined as “an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.” In brief, if we buy a property and sells it in the future, it should give us positive returns. An overpriced property is NOT going to give us a positive return yeah. It will only be negative. In one sentence? Assuming all similar condos in the area are RM700 per sq ft and this project we are about to buy is RM900 per sq ft but they give us 20% rebate which reduced it RM720 per sq ft. This is definitely an overpriced unit and we need to pray that the market is good in the future for us to sell it and call it an asset…
Before we move further however, there’s this thing called GLOBAL ECONOMY. Something that happens in some other parts of the world will usually affect all other parts of the world too. We are talking about the potential of a crisis. Reported in TheStar is this article about the potential of a sharp tightening of financial conditions.  Specifically, International Monetary Fund (IMF) is talking about the United States. It (IMF) says, “Asset valuations appear to be relatively high in some markets, notably in the United States.” In its latest Global Financial Stability Report, this was one general conclusion, “Overall, market participants appear complacent about the risk of a sharp tightening of financial conditions.”

Other things reported included:
1) Short-term risks to global financial stability have increased “modestly.” (not considered negative yet)
2) Interest rates remain low by historical standards, and financial conditions are still supporting growth (considered positive)
3) U.S. equities have risen “well beyond” the valuations they enjoyed before the global financial crisis (RISKY yeah…)
4) Housing prices appear frothy (means inflated / bubbles) in several advanced economies, including Australia and Canada as well as Nordic nations.
5) “In some advanced economies, some investors have grown overly confident and even possibly even complacent.”  (People are taking far higher risks without any safety nets)

6) Credit conditions in emerging markets have tightened since mid-April, driven by a stronger U.S. dollar, escalating trade tensions, and political and policy risks unique to individual countries. (Negative sign, meaning harder to get financing)
7) Overall risks in emerging markets remain “moderate compared with historical levels,” (neutral yeah)
8) Central banks in advanced economies raise interest rates.  (When this happens, the funds invested in emerging markets would usually return to their home market)
9) There’s a 5 percent probability that emerging markets other than China could face debt-market outflows of at least $100 billion, on par with the capital flight during the financial crisis. (Still very small percent of it happening)
Full article in TheStar here. 
This warning is not something we note only when it’s issued by the IMF.  As a working professional, it’s important to have an emergency fund of 6 months just in case we lose our job and needs time to find a new one. As the breadwinner of the family, we should be sufficiently protected by insurance so that we do not need to spend so much of our savings every time we need serious medical attention. As for what could happen to the world economy, no one is able to give us an exact answer. We just need to be prepared all the time, somehow. A good point to note is that tough times do not last, tough people do. In other words, a crisis may ‘kill’ many of our competitors but when the crisis is over, we will be a very strong player in the market.
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written on 10th Oct 2018
Next suggested article: Economy? Bubble? Look at banks, just numbers.


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